This Simple Formula Will Tell You What to Pay Every Employee

Deciding what salary to offer is hard. Follow these steps to make it a little easier.

You know you need to hire new employees for your company or department. That means grappling with one of the thorniest questions you have to answer as boss: Just how much should you pay each of them? Should you pay market value for key technology skills, even though it's not in your budget? Should you stick to the salary you can afford, even if it means losing a key hire? What about stock options?

While we can't tell you how much to pay, we can provide a framework that makes it easier for you to decide, courtesy of Chase Garbarino, a serial entrepreneur and CEO of VentureApp, which helps connect startups to vendors and experts they may need. With 10 years' experience creating startup companies, he's had to learn how to make those compensation dollars count.

Here's how he does it:

1. Determine what a key hire is for you.

A key hire will bring skills to the table that you yourself lack but that you need to have a successful company, Garbarino says. "Key hires should be relatively obvious--people needed to execute on product or achieving product-market fit," he says. "If you're technical, find team members who can handle business development, sales, and marketing. If you are the opposite, key hires will be technical."

Beyond that, figure out what skills you need to get to your next goal, which may be more funding, market awareness, a revenue target, or something else. "Mapping this will make it simpler to understand whom you need to keep building product and growing customer base," he says.

2. Think in terms of job categories rather than specific positions.

This is especially important in a startup, where employees will likely have to jump in and perform functions outside their traditional job descriptions to keep the company on track. "Choose talented but versatile people," Garbarino advises. "Assign them to buckets instead of roles--marketing, sales, product, etc."

3. Decide how much each bucket matters to your overall success.

"Assign a percentage out of 100, depending on the importance of that category at that stage to your company and getting to the next level," Garbarino says. Once you've figured out how big a percentage of your potential success is attributable to each bucket of functions, you'll have a good guide as to how important each job is. "You then have a capital and option pool range for each bucket."

4. Divide your employees into tiers, depending on their experience and abilities.

"If the person is able to do the bare minimum required of a position at their start date, assign value accordingly," Garbarino says. "If they have more experience, or a deeper level of understanding that adds strategic value, they are more valuable overall." You should wind up with two or three tiers for each function area, taking into account ability and experience. Combine that with the value of each job category to your company (the percentages you worked out earlier). That should give you a general idea of how compensation should be divided up.

5. Make two compensation plans.

For each tier within each job category in your company, have two different compensation options, one that comes with a higher salary and less equity, and one that has more equity, but a lower base pay. You'll have to assign dollar prices to stock option packages based on the company's highest value. Give employees and prospective employees the option to choose between these two packages. You should particularly value those who opt for the high-equity package, Garbarino says.

"Job candidates who choose more equity and less cash are clearly 'in it to win it,'" he says. "Taking more stock shows commitment to long-term and a tolerance for risk which is needed in the seed-stage startup world."

6. Stick to your budget.

Once you've done these calculations, stick to them, Garbarino advises. He also suggests doing a little market research to find out what the going rate is for the skills you're hiring. It may be tempting to bend the rules in order to snap up a seemingly perfect employee. Resist that temptation, and be guided by your financial and practical needs instead.

"Know what you need to get out of a position, as well as what it's worth to you," he says."